Modest Recovery This Quarter
June 30, 2016
SAUDI BUILDING MATERIALS 2Q2016 Preview
Modest Recovery This Quarter After a modest ride in the first quarter of this year, we look towards slightly weaker expectations forward for earnings in the second quarter. A seasonal adjustment is due considering an early impact of Ramadan. 2Q2016 was less timid as oil (Brent) prices surprisingly moved up by +18% from their lows of US$ 27/bbl. However, TASI index relatively recorded a modest rebound of +19% from its lows of ,54,5 as compared to oil. A major drive for the TASI came from announcements related to vision 2030 and reforms by the government. For the quarter, TASI index returned +4%, while the sector index (TBMCI) registered a growth of +7%, aided by a recovery in some of the key sector stocks such as Saudi Ceramics and Bawan. Our coverage stocks are trading at median 2016E P/E of 18.7x versus overall sector’s 81.0x and TASI’s 81.,x.
Due for recovery though slightly delayed The sector is showing signs of a delayed recovery and is driven by slowing project market, which according to MEED is not expected to recover until 2017. Some of the most evident concerns are i) declining project awards data which recorded a fall of -25% Q/Q in 1Q2016 ii) -18% decline in real estate sales transactions during the quarter across KSA and iii) oversupply in private commercial and residential real estate projects. Industry indicators are showing signs of a delayed recovery as outlook remains weak, however feeble signs of growth emerge from government backed housing sector. The impact of white land tax over the short run is slightly negative as land prices are set for a decline while over long term, real estate developments are likely. Overall, impact on sector earnings is limited in the short run but we await clarity in the long run.
Commodities shows some relief A relief rally in commodities suggests some price driven growth for companies in their top line. Notably, growth in steel and aluminum prices over the quarter is a positive for the sector. We believe commodities are in the midst of recovery cycle as China’s consumption trends are showing some signs of growth. The performance of global base metal prices were resilient, especially prices of aluminum and steel, improving over the quarter. Iron ore prices decreased by -5% Q/Q to USD 58/ton after a sharp rally in 2Q2016. Aluminum moderately increased by +8% Q/Q to USD 1,644/ton while copper declined by -1% Q/Q to 4,818/ton. Ex h ibit 1: Global Base Metals Performan ce 30%
2Q15
3Q15
4Q15
1Q16
2Q16 23%
20%
16% 13%
8%
10%
7%
3%
3%
1%
3%
0% -1% -5%
-10%
-4% -7%
-3%
-4%
-5%
-5%
-5%
-5%
-5%
-9% -10%
-5%
-16%
-20%
-23%
-30% Aluminum
Copper
Zinc
Lead
Iron ore
Source: Bloomberg
Santhosh Balakrishnan
Abdullah Alrayes
[email protected] +966-11-203-6809
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI BUILDING MATERIALS 2Q2016 Preview
Ramadan impact to affect construction activity We believe an early impact of Ramadan versus previous years coupled with lower utilization could pressure growth, though this is expected. Margins versus last quarter have relatively declined because of the cut in subsidies as most companies started witnessing the pressure.
Earnings trend to be weaker on seasonality We forecast 2Q2016 estimates with minimal revisions to our full year projections. We believe a detailed interpretation of the impact of hike in utility tariffs is unclear and expect this to take another 1-2 quarters to clearly depict a forward trend. We expect revenues to register a decline of -18% Y/Y and earnings to decline -64% Y/Y for the companies under our coverage. Table 1: 2Q2016 Estimates (SAR mln, except per share data) Revenue Company
2Q2015
2Q2016E
Ceramics
444
330
Bawan
646
Aslak Zoujaj Amiantit
EBITDA Y/Y Chg
Net Income Y/Y Chg
2Q2015
2Q2016E
EPS
2Q2015
2Q2016E
Y/Y Chg
2Q2015
-26%
122
83
-32%
84
41
-51%
1.68
2Q2016E 0.83
582
-10%
43
49
14%
24
26
10%
0.40
0.44
269
170
-37%
32
20
-38%
25
14
-44%
0.57
0.32
23
28
21%
7
10
49%
17
9
-45%
0.55
0.31
673
570
-15%
105
86
-18%
26
(28)
-208%
0.23
(0.24)
Source: Riyad Capital, Company Reports
Saudi Ceramics is expected to witness a -51% Y/Y decline due to ailing ceramics segment as margins continue to erode, coupled with impact of early Ramadan. Bawan is expected to witness a +10 Y/Y growth, as margins improvement in metals segment is likely amid a robust growth in packaging segment. Aslak is expected to register a sluggish 2Q16 as early Ramadan impact could affect growth as witnessed in the previous years. Zoujaj’s earnings are expected to fall as associates fail to deliver decent performance. It is expected to register Y/Y EPS decline of -44%. Amiantit is likely to record the remainder of its provisions this quarter due to impact from one of its subsidiaries. As a result it is likely to report loss of SAR 28 million this quarter.
Valuations reach a mid-cycle peak Out of the coverage5 Bawan’s and Zoujaj’s stock price has declined significantly in 1Q, while the same witnessed a reasonable reversion in 2Q. TASI was up by +4%, while the sector (TBMCI) was up by +7%. Some of the sector stocks did not witness a reversion trend due to standalone fundamental issues and have underperformed TASI and TBMCI. Valuations of coverage stocks have retracted to a P/E of 11.7x its 2016E earnings, while on a TTM basis hovering around same levels. Table 2: TASI Building Materials Sector Stocks Trailing Multiples Company Name Saudi Arabian Amiantit Co Red Sea Housing Services Co Abdullah A.M. Al-Khodari Sons Co Saudi Steel Pipe Co Bawan Co National Gypsum United Wire Factories Co Arabian Pipes Co Saudi Ceramic Co Saudi Industrial Development Co Middle East Specialized Cables Co Zamil Industrial Investment Co Saudi Cable Co National Co for Glass Manufacturing/The Sector Median
Price (SAR) 8.20 25.79 11.63 18.19 23.04 13.90 23.97 13.33 39.15 10.52 7.42 28.13 6.76 20.79
Mcap EV SAR SAR Mln Mln
P/E
P/B
P/S
EV/ Sales
EV/ EBITDA
Div.Yld (%)
YTD (8%) 6% (24%) (16%) (1%) (13%) 9% (1%) (16%) (25%) (20%) (14%) (12%) (21%)
947 1,547 649 928 1,382 440 1,052 533 1,957 421 445 1,688 514 624
2,890 1,772 1,760 1,242 1,994 367 883 937 2,661 308 907 3,867 1,617 664
19.1x 20.0x 27.3x 24.0x 15.3x 22.1x 13.9x N/A 7.9x N/A N/A 7.0x N/A 16.0x
0.7x 1.5x 0.7x 1.2x 1.8x 1.0x 2.1x 0.9x 1.0x 1.1x 1.2x 0.9x 1.3x 1.1x
0.3x 1.5x 0.4x 1.2x 0.6x 5.5x 1.2x 1.9x 1.2x 1.3x 0.5x 0.3x 0.3x 5.7x
1.1x 1.6x 1.1x 1.5x 0.7x 4.4x 0.7x 2.9x 1.6x 0.9x 1.0x 0.7x 0.9x 6.0x
8.3x 8.3x 10.3x 14.2x 8.8x 11.8x 6.0x N/A 6.1x 11.1x 68.3x 6.8x N/A 17.3x
7.9 2.9 N/A N/A 4.3 4.3 5.4 N/A 5.1 N/A N/A 7.1 N/A 2.4
11,643
19,447
12.50x
1.00x
1.00x
1.30x
11.30x
5.2
52 Wk- 52 WkHi (SAR) Lo (SAR) 13.45 39.30 29.24 30.20 40.67 25.00 35.00 21.80 80.25 18.30 14.00 61.75 9.95 41.10
6.50 15.90 8.38 14.80 14.00 10.60 14.50 7.70 32.30 7.80 5.90 24.25 5.60 15.85
Source: Bloomberg
Page 2 of 4
SAUDI BUILDING MATERIALS 2Q2016 Preview
Conclusion We maintain our target prices and ratings for Saudi Ceramics and Zoujaj but adjust for Bawan to Neutral and Sell for Aslak and Amiantit and may revise if we see a valuation opportunity. The sector is likely to witness some decline on volume growth rates as demand slows due to early Ramadan effect, hence earnings could see a seasonal trend. We do not see any large recovery for the rest of 2016 unless the reforms drive growth in a more amicable manner, which we believe is gradual. We maintain our neutral view on the sector. Table 3: Ratings and Valuations (SAR mln) Company
TASI Code
Rating New
CMP (SAR)
12-Month Target price
Ceramics
2040
Buy
39.15
50.00
Bawan
1302
Neutral
23.04
21.00
(9%)
Aslak
1301
Sell
23.97
17.00
(29%)
Zoujaj
2150
Buy
20.79
23.00
11%
Amiantit
2160
Sell
8.20
7.50
(9%)
Upside 28%
Source: Riyad Capital
Page 3 of 4
SAUDI BUILDING MATERIALS 2Q2016 Preview
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Page 4 of 4
SAUDI BUILDING MATERIALS 2Q2016 Preview
Modest Recovery This Quarter After a modest ride in the first quarter of this year, we look towards slightly weaker expectations forward for earnings in the second quarter. A seasonal adjustment is due considering an early impact of Ramadan. 2Q2016 was less timid as oil (Brent) prices surprisingly moved up by +18% from their lows of US$ 27/bbl. However, TASI index relatively recorded a modest rebound of +19% from its lows of ,54,5 as compared to oil. A major drive for the TASI came from announcements related to vision 2030 and reforms by the government. For the quarter, TASI index returned +4%, while the sector index (TBMCI) registered a growth of +7%, aided by a recovery in some of the key sector stocks such as Saudi Ceramics and Bawan. Our coverage stocks are trading at median 2016E P/E of 18.7x versus overall sector’s 81.0x and TASI’s 81.,x.
Due for recovery though slightly delayed The sector is showing signs of a delayed recovery and is driven by slowing project market, which according to MEED is not expected to recover until 2017. Some of the most evident concerns are i) declining project awards data which recorded a fall of -25% Q/Q in 1Q2016 ii) -18% decline in real estate sales transactions during the quarter across KSA and iii) oversupply in private commercial and residential real estate projects. Industry indicators are showing signs of a delayed recovery as outlook remains weak, however feeble signs of growth emerge from government backed housing sector. The impact of white land tax over the short run is slightly negative as land prices are set for a decline while over long term, real estate developments are likely. Overall, impact on sector earnings is limited in the short run but we await clarity in the long run.
Commodities shows some relief A relief rally in commodities suggests some price driven growth for companies in their top line. Notably, growth in steel and aluminum prices over the quarter is a positive for the sector. We believe commodities are in the midst of recovery cycle as China’s consumption trends are showing some signs of growth. The performance of global base metal prices were resilient, especially prices of aluminum and steel, improving over the quarter. Iron ore prices decreased by -5% Q/Q to USD 58/ton after a sharp rally in 2Q2016. Aluminum moderately increased by +8% Q/Q to USD 1,644/ton while copper declined by -1% Q/Q to 4,818/ton. Ex h ibit 1: Global Base Metals Performan ce 30%
2Q15
3Q15
4Q15
1Q16
2Q16 23%
20%
16% 13%
8%
10%
7%
3%
3%
1%
3%
0% -1% -5%
-10%
-4% -7%
-3%
-4%
-5%
-5%
-5%
-5%
-5%
-9% -10%
-5%
-16%
-20%
-23%
-30% Aluminum
Copper
Zinc
Lead
Iron ore
Source: Bloomberg
Santhosh Balakrishnan
Abdullah Alrayes
[email protected] +966-11-203-6809
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI BUILDING MATERIALS 2Q2016 Preview
Ramadan impact to affect construction activity We believe an early impact of Ramadan versus previous years coupled with lower utilization could pressure growth, though this is expected. Margins versus last quarter have relatively declined because of the cut in subsidies as most companies started witnessing the pressure.
Earnings trend to be weaker on seasonality We forecast 2Q2016 estimates with minimal revisions to our full year projections. We believe a detailed interpretation of the impact of hike in utility tariffs is unclear and expect this to take another 1-2 quarters to clearly depict a forward trend. We expect revenues to register a decline of -18% Y/Y and earnings to decline -64% Y/Y for the companies under our coverage. Table 1: 2Q2016 Estimates (SAR mln, except per share data) Revenue Company
2Q2015
2Q2016E
Ceramics
444
330
Bawan
646
Aslak Zoujaj Amiantit
EBITDA Y/Y Chg
Net Income Y/Y Chg
2Q2015
2Q2016E
EPS
2Q2015
2Q2016E
Y/Y Chg
2Q2015
-26%
122
83
-32%
84
41
-51%
1.68
2Q2016E 0.83
582
-10%
43
49
14%
24
26
10%
0.40
0.44
269
170
-37%
32
20
-38%
25
14
-44%
0.57
0.32
23
28
21%
7
10
49%
17
9
-45%
0.55
0.31
673
570
-15%
105
86
-18%
26
(28)
-208%
0.23
(0.24)
Source: Riyad Capital, Company Reports
Saudi Ceramics is expected to witness a -51% Y/Y decline due to ailing ceramics segment as margins continue to erode, coupled with impact of early Ramadan. Bawan is expected to witness a +10 Y/Y growth, as margins improvement in metals segment is likely amid a robust growth in packaging segment. Aslak is expected to register a sluggish 2Q16 as early Ramadan impact could affect growth as witnessed in the previous years. Zoujaj’s earnings are expected to fall as associates fail to deliver decent performance. It is expected to register Y/Y EPS decline of -44%. Amiantit is likely to record the remainder of its provisions this quarter due to impact from one of its subsidiaries. As a result it is likely to report loss of SAR 28 million this quarter.
Valuations reach a mid-cycle peak Out of the coverage5 Bawan’s and Zoujaj’s stock price has declined significantly in 1Q, while the same witnessed a reasonable reversion in 2Q. TASI was up by +4%, while the sector (TBMCI) was up by +7%. Some of the sector stocks did not witness a reversion trend due to standalone fundamental issues and have underperformed TASI and TBMCI. Valuations of coverage stocks have retracted to a P/E of 11.7x its 2016E earnings, while on a TTM basis hovering around same levels. Table 2: TASI Building Materials Sector Stocks Trailing Multiples Company Name Saudi Arabian Amiantit Co Red Sea Housing Services Co Abdullah A.M. Al-Khodari Sons Co Saudi Steel Pipe Co Bawan Co National Gypsum United Wire Factories Co Arabian Pipes Co Saudi Ceramic Co Saudi Industrial Development Co Middle East Specialized Cables Co Zamil Industrial Investment Co Saudi Cable Co National Co for Glass Manufacturing/The Sector Median
Price (SAR) 8.20 25.79 11.63 18.19 23.04 13.90 23.97 13.33 39.15 10.52 7.42 28.13 6.76 20.79
Mcap EV SAR SAR Mln Mln
P/E
P/B
P/S
EV/ Sales
EV/ EBITDA
Div.Yld (%)
YTD (8%) 6% (24%) (16%) (1%) (13%) 9% (1%) (16%) (25%) (20%) (14%) (12%) (21%)
947 1,547 649 928 1,382 440 1,052 533 1,957 421 445 1,688 514 624
2,890 1,772 1,760 1,242 1,994 367 883 937 2,661 308 907 3,867 1,617 664
19.1x 20.0x 27.3x 24.0x 15.3x 22.1x 13.9x N/A 7.9x N/A N/A 7.0x N/A 16.0x
0.7x 1.5x 0.7x 1.2x 1.8x 1.0x 2.1x 0.9x 1.0x 1.1x 1.2x 0.9x 1.3x 1.1x
0.3x 1.5x 0.4x 1.2x 0.6x 5.5x 1.2x 1.9x 1.2x 1.3x 0.5x 0.3x 0.3x 5.7x
1.1x 1.6x 1.1x 1.5x 0.7x 4.4x 0.7x 2.9x 1.6x 0.9x 1.0x 0.7x 0.9x 6.0x
8.3x 8.3x 10.3x 14.2x 8.8x 11.8x 6.0x N/A 6.1x 11.1x 68.3x 6.8x N/A 17.3x
7.9 2.9 N/A N/A 4.3 4.3 5.4 N/A 5.1 N/A N/A 7.1 N/A 2.4
11,643
19,447
12.50x
1.00x
1.00x
1.30x
11.30x
5.2
52 Wk- 52 WkHi (SAR) Lo (SAR) 13.45 39.30 29.24 30.20 40.67 25.00 35.00 21.80 80.25 18.30 14.00 61.75 9.95 41.10
6.50 15.90 8.38 14.80 14.00 10.60 14.50 7.70 32.30 7.80 5.90 24.25 5.60 15.85
Source: Bloomberg
Page 2 of 4
SAUDI BUILDING MATERIALS 2Q2016 Preview
Conclusion We maintain our target prices and ratings for Saudi Ceramics and Zoujaj but adjust for Bawan to Neutral and Sell for Aslak and Amiantit and may revise if we see a valuation opportunity. The sector is likely to witness some decline on volume growth rates as demand slows due to early Ramadan effect, hence earnings could see a seasonal trend. We do not see any large recovery for the rest of 2016 unless the reforms drive growth in a more amicable manner, which we believe is gradual. We maintain our neutral view on the sector. Table 3: Ratings and Valuations (SAR mln) Company
TASI Code
Rating New
CMP (SAR)
12-Month Target price
Ceramics
2040
Buy
39.15
50.00
Bawan
1302
Neutral
23.04
21.00
(9%)
Aslak
1301
Sell
23.97
17.00
(29%)
Zoujaj
2150
Buy
20.79
23.00
11%
Amiantit
2160
Sell
8.20
7.50
(9%)
Upside 28%
Source: Riyad Capital
Page 3 of 4
SAUDI BUILDING MATERIALS 2Q2016 Preview
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Page 4 of 4
